Monday, 13 December 2010

Public Private Partnerships

 In this video I look at types of PPPs, why they exist and their advantages and disadvantages. 

Public Private Partnerships

What are they?
This is an organisation which includes both the private sector and public sector. These schemes have been a key way to improve services since 1997. 
Why do they exist?
The public sector, in theory, has more power and funding which can benefit the private sector and the private sector is believed to be more efficient in terms of price, output and choice which is great in terms of promoting consumer welfare.

Examples of PPP

Partial Privatisation - When a public firm is partly owned by the private sector.

PFI (Public Finance Initiative) - This is when a private sector firms produces a service that the government provides e.g. roads, schools, hospitals etc and leases it out to the government.

Contracting Out - This is when the private sector delivers services such as hospitals, schools etc (think private schools, private healthcare, toll roads)
Contracting out is usually done in partnership with ‘Competitive tendering’ - This is where the private sector is given the opportunity to provide public sectors by bidding for this opportunity. This means that firms need to make their plans seems the best for consumers because the government picks the firm with the best deal to consumers.

Pros of PPP
  1. Private sector firms are guaranteed to make a profit.
  2. The government can produce more as it does not have to pay up front. In the short-term it costs the government much less.
  3. The evidence of the success of this we have already seen e.g. in recent years the amount of hospitals, schools etc that have come about has never been this high.
  4. As the cost is spread over a longer period of time the government does not have to raise taxes or borrow money in the short-term. 

Cons of PPP
  1. Private sector firms have an incentive to charge sky high prices and make a large profit as this is a monopsony market structure and this is bad for consumers and the government.This higher profit could have gone to the government.
  2. Is the governments (in terms of competitive tendering) interested in the welfare of consumers or how much tax revenue they will make?
  3. Higher cost once you add all the rents.
  4. Private firms may cut cost to maximise profit e.g. construction material might be poor quality and this could subsequently lead to poor motivation by workers.

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